Cargoes, Ships, & the Economics of Shipping

^Shipping Derives its Demand from the Global Economy. Image Courtesy of Studio_G at ShutterStock.com

Shipping: A Pragmatic Trade

Shipping derives its demand from the global economy. The better the state of the global economy, the more is the demand for shipping because ships carry 90% of the globally traded cargo.

Now, an infinite number of factors affect the performance of the global economy. Even the mere possibility of certain events impacts the global economy regardless of whether the event actually materializes. The point is, the demand for shipping is highly volatile.

But that is not all. The supply of ships responds very slowly to changes in demand because it takes 2-3 years to build a ship. Purchasing a second hand ship too is time consuming. Plus, ships have a 20-30 year life and financially it is not a very great idea to change ships frequently.

Effectively, this means the demand supply gap can be very large and take ages to adjust. And considering the long life of ships, the fleet with a shipowner will typically consist of ships of various ages, types, and technologies.

Despite the increased specialization of ships, different types of vessels can replace each other. This interchangeability is a great asset when demand far exceeds supply because supply adjusts at snail’s pace.

Oil Prices 1861 to 2007: Note the Sharp Price Rises in 1973 and 1980Image Courtesy of TomTheHand at https://en.wikipedia.org/wiki/File:Oil_Prices_Since_1861.svg

For example, combination carriers that can transport wet as well as dry cargo somewhat mitigated the oil tanker shortage during the Oil Shock of 1973. With great many types of cargo, such interchangeability is important for the continuity of global commerce.

Even otherwise, cargo owners (shippers) are more interested in whether the chosen vessel can offer fast, inexpensive, and reliable transport. They are least bothered about the type of vessel.

Be as it may, studying the types of cargoes and vessels is essential to understand maritime economics. And so is the understanding of the economics of diverse types of vessels.

Types of Cargo

Broadly, cargo is either bulk or non-bulk (general). The five main types of cargo include:

Liquid Bulk Cargo: is operated by pumps. Crude oil is the most important under this head. Other members include LPG, LNG, oil products, and chemicals

Homogenous Bulk Cargo: is granular and handled by automated equipment. It is further classified as:

Minor Bulk Cargo: does not allow economies of scale. It is expensive and includes diverse goods such as paper, bagged fertilizers, lumber, steel ingots, cement, sugar, scrap, manganese, rice, pig iron and the like

TI Class Supertanker is the World’s Largest TankerImage Courtesy of PA2 Dan Tremper, USCG cropped by User:Ultra7Retrieved From https://en.wikipedia.org/wiki/File:Hellespont_Alhambra-223713_v2.jpg

Unit Load Cargo: has to be packed separately. You cannot pour it into the ship. Steel goods, tree trunks, paper rolls etc. make up this cargo type

Refrigerated Cargo: is either transported through reefers (refrigerated cargo ships) or refrigerated containers. It includes perishable goods such as fish, fruits, meat, bananas etc.

Crude oil and major bulk cargo are almost completely shipped in bulk vessels. Economics and vessel availability govern the choice of vessel for minor bulk cargoes – they are either shipped in bulk vessels or liner ships.

But, there are other ways of looking at cargo classification. Based on commodities, cargo can be:

Valemax VLOC is the World’s Largest Bulk CarrierImage Courtesy of Robert Smith at http://www.shipspotting.com/gallery/photo.php?lid=1470586Retrieved From https://en.wikipedia.org/wiki/File:Vale_Rio_de_Janeiro_20120108_01.jpg

Shipping greatly depends on the energy and metal goods trade that form over 70% of the tonnage in seaborne trade. Other commodities include:

Other Goods: capital goods, machinery, vehicles, and textiles. Their total tonnage is low but their high value makes them the chief cargo for liners

Agricultural Products: cereals, fertilizers, refrigerated food, animal feed, fats, sugar, oil, and molasses. Population and income levels create demand for foodstuff while land productivity and land use influence supply

Forest Goods: include timber, plywood, paper, and woodpulp that serve as raw materials for the paper, construction, and paper board industries. Availability of forest resources shapes the supply

MSC Oscar is the World’s Largest Container ShipImage Courtesy of kees torn at https://www.flickr.com/photos/68359921@N08/16520366958/Retrieved From https://en.wikipedia.org/wiki/File:MSC_Oscar_(ship,_2014)_002.jpg

General cargo can be anything that is too small to engage an entire ship:

Containerized Cargo: is presently the main form of general cargo transport

Loose Cargo: is stored separately

Refrigerated Cargo

Pre-Slung Cargo: includes small items grouped together into standard-sized packages

Palletized Cargo: is packed on a mattress

Liquid Cargo: is carried in containers, barrels, or tanks

Heavy and Odd-Shaped Cargo

Types of Cargo Vessels

As mentioned, shippers are not interested in the type of ship per se. They are interested in whether the chosen vessel can offer fast, inexpensive, and reliable transport.

Because a particular cargo can travel via diverse vessels, the term ship type is very flexible. For example, a 20,000 dwt tanker will be a separate type from a 40,000 dwt tanker as both operate in different markets.

Plus, there is the aforementioned unpredictability of shipping markets that adds to the uncertainty while choosing vessel types. The table below provides a broad overview of the types of cargo ships:

Cargo Vessels

Liners

Bulk Carriers

Tankers

Specialized

Container Ship

Capesize

Very Large Crude Carrier (VLCC)

LPG Tanker

Multipurpose

Panamax

Suezmax

Ore Carrier

Ro-Ro

Post Panamax

Aframax

Refrigerated Ship

Tweendecker

Handy

Panamax

Cement Carrier

BCV

Open Bulker

Parcel Tanker

Vehicle Carrier

Mini Bulker

Product Tanker

Heavy Lift

Combined Carriers

Chip Carrier

The choice of ship depends on a combination of:

Type of Cargo: while many cargoes can use more than one ship type, LNG and nuclear waste require specialist vessels

Value of the cargo, the unit (least quantity) in which it is shipped, and its stowage factor determine a ship’s:

deadweight

cargo space dimensions and segregations

cargo handling equipment

access to cargo space

speed

High value cargo requires faster ships and vice versa. But when freight rates are high, owners will run ships at full speed irrespective of the cargo they are carrying. Stowage Factor is the volume occupied by a ton (one unit) of cargo

You Can Directly Drive Wheeled Cargo On & Off Roll On Roll Off (Ro-Ro) VesselsImage Courtesy of Wolfgang Hagele at http://de.wikipedia.org/wiki/Bild:Roro_faehre.jpgRetrieved From https://en.wikipedia.org/wiki/File:Roro_faehre.jpg

Type of Shipping Operation: ship owners with long term charters know the cargo and ports in advance. They will choose a ship optimized to the known ports and cargo

Those with short term contracts will look for ships that are acceptable to clients and have a reasonable resale value

Operational Approach: some owners will look for general, flexible vessels while others will look for specialist ships

Lateral Cargo Mobility (LCM) Coefficient measures the number of cargo types (units) a ship can carry:

LCM 1 for container ships, bulk carriers, tankers, and vehicle carriers because they can carry only one type of cargo unit

LCM 2 for combined carrier that can carry crude oil plus dry cargo

LCM 6 for ro-ro vessels

Highest LCM for multi-purpose cargo liner that can carry almost all types of cargo

If the above discussion makes you think that the economic success of a vessel type rises with an increase in its flexibility, you are not entirely correct. At least this is what the track record of vessels over the past five decades suggests.

Malcolm Mc Lean: The Inventor of the Container Ship Image Courtesy of Maersk Line at https://www.flickr.com/photos/maerskline/7312751706/ Retrieved From https://en.wikipedia.org/wiki/File:Malcolm_McLean_at_railing,_Port_Newark,_1957_(7312751706).jpg

Specialization usually wins over flexibility over the very long term. Maybe because specialization is the basis of economic growth and development – you make what you are good at and purchase the rest.

This makes sense because everyone uses resources efficiently and cuts down production costs. It will actually cost you less to buy things that you are not good at making than to make them yourselves.

Economics of Bulk & Liner Shipping

In shipping, a parcel is the amount of cargo carried in an individual packing. It may range from (say) 500 boxes of liquor to 1 million tons of oil. Through parcel size distribution (PSD), shippers answer the all-important question: which cargo to send in which ship.

While bulk cargo can engage an entire ship, general cargo is smaller and is shipped with other cargo. Many commodities can travel either as bulk or general cargo.

If shippers have to transport low volume cargo, they do it as general cargo. This changes to bulk cargo with sufficient expansion in the volume of trade.

Up to 1966, all general cargo was packed separately. This was a slow, labor-intensive, and expensive process. Containers replaced this process and the rest is history.

Bulk trades require fast, reliable, and time-bound transportation. In turn, this requires considerable investment in ships of high cargo capacity and rapid cargo handling mechanisms. And such investment is viable only if they provide sizable cost reductions.

Packing, loading-unloading, and transporting smaller parcels requires more logistical, labor and administrative operations. This is the difference between the bulk and liner segments. The former focuses on cutting unit costs while the latter provides speed, quality, and reliability of service.

Bulk Shipping: shipping large quantities of cargo to minimize transport costs has been an age-old concept. It is only the scale of bulk shipping that has expanded tremendously in the recent past.

Bulk commodities are those with uniform physical character. You can easily transport such cargo in enormous quantities to minimize transport costs.

While economic and physical features of bulk cargo govern its PSD, it is the physical features that determine the type of ship and cargo handling equipment.

Transport systems include transport and storage elements. During bulk shipping, cargo is handled fourteen times between the producer and the importer. In order to minimize costs, transport system designers look to:

Obtain Economies of Scale: unit costs of transport and storage fall as the quantity of transported / stored cargo rises

Minimize the Number of Times the Cargo is Handled: as cost and operating time shoot up every time you handle the cargo

You can do this by lowering the number of transport stages viz. relocate a manufacturing / processing plant near the port

Improve the Efficiency of Cargo Handling: by combining all transport legs of the system. Employing standard cargo packages such as containers is a classic example

Using fast and efficient cargo handling equipment is another way to do this. Specialist terminals have evolved because cargo handling, transport, and storage infrastructure is different for diverse cargoes

Minimize Storage: to lower costs

Often, following these principles is an expensive proposition. Relocating plants entails sizable investment. Applying these principal for seasonal goods such as agricultural commodities is even tougher.

Then again, these principles may contradict each other. For example, shipping expensive minor bulk cargo in large quantities lowers cost. But importers ask for low volume assignments due to large inventory costs associated with such cargo.

You can ship cargo in bulk if it is:

necessary to ship it in large volumes

not extremely expensive

compatible with automated material handling systems

shipped regularly

Europe and Japan created the demand for bulk trades till the early 1970s. The Oil Shock of 1973, dollar devaluation of 1971, and the shift of European and Japanese economic structures slashed this demand. Bulk trade rose in the 1980s as China and South Korea created the demand.

Liner Shipping: liner services transport general cargo, the value of which is about 60% of the value of cargo traded by sea. This transport service comes at a predictable rate and is fast, reliable, and frequent. Normally liners reach their destination at predetermined times.

Because rates are not as volatile as in the charter market and because the duration of their journey is rather fixed, you can work out your cash flows and plan your finances in advance.

RMS St Helena: A Cargo LinerImage Courtesy of Burgh House at https://en.wikipedia.org/wiki/File:RMS_St_Helena.jpg

Cargo liners of the pre-1950s era were labor intensive. As the colonies of European powers attained independence, cargo liners lost their main trades. Plus, labor became expensive. Liners started to lose out to bulk ships.

This necessity invented containers that enabled inexpensive, automated, and fast loading-unloading. Then came cellular ships, rail vehicles, and special trucks that could transport containers.

Equipment and special port terminals capable of handling containers followed as did the standardization of container size, weight, floor strength, and corner casting strength. These developments were essential because containers now traversed over roads and railways as well.

A company named Sea-Land ran the first deep sea container service in the North Atlantic in April 1966. This was Malcolm McLean’s company, a former trucker who had first thought of the concept of container ships in 1937 during a frustrating wait at a port.

With containerization, liner companies started to provide complete service from source to destination at all stages of transport – road, rail, and sea. This was because now only unitized and integrated operations were economically viable.

Slow, crowded ports made way for fast, automated terminals with minimal staff. Inefficient liner companies disappeared and the surviving ones grew in size and operations.

When studying the economic principles of liner operation, we must understand that, in contrast to bulk ships, liner vessels:

carry all the cargo they receive

operate regularly between named ports at fixed dates and at regular intervals even if it means running ships at part loads

cannot negotiate separately with each of their umpteen customers

Through all this, their operations acquire a more inflexible character and add to the administrative overheads. Again, some of the goods they transport are seasonal and this creates capacity issues.

Six components of the costs of liner services include:

Service Schedule

Ship Costs

Port Charges

Container Operations

Container Costs

Administration

Pricing for liners is more complex. Liners fix the rates for each unit of diverse cargo classes. These will of course depend on how expensive the commodity is and the prevailing market conditions. They add the other costs to this base rate and may offer discounts to large clients.

Shippers look for some combination of the following factors while choosing a liner company:

Freight Cost

Space Availability: particularly at short notices

Efficiency of Administration

Punctuality and Transit Times

The Role of Ports

Bulk and liner trades have witnessed the greatest developments in port and cargo handling technology. Advanced terminals at Hong Kong, Rotterdam, and Singapore support the liner trade and so do a whole lot of minor ports across the world.

Ports are the necessary interface between land and sea. At ports, ships stop alongside land for loading-unloading. Terminal is a part of the port that handles the loading-unloading of a certain type of cargo. Port Authorities provides the required maritime services.

Apart from providing berthing and rapid loading-unloading facilities, ports must make available the means of cargo storage while integrating road and rail transport mechanisms with port operations for streamlined cargo flow.

Finally

Perhaps because it depends heavily on the volatile global economy, shipping is far from perfect. Neither are there any airtight divisions between the types of ships and cargoes. Demand supply equations change frequently and only the smart ones tide through this volatility.